Wealth Plan Tune-Up: Tips for a Successful 2022

January 19, 2022 · Written By JFS Wealth Advisors

With the New Year full-speed upon us, we would like to take the opportunity to thank you for your continued trust. As always, our primary goal is to help you achieve yours. As the new year resets the calendar from a tax-planning perspective, it’s beneficial to think through items, such as gifting, retirement contributions, and more. To that end, there are several planning opportunities to consider right now.

If you are a client of JFS Wealth Advisors, your advisory team will work with you during the year to advise you on many of these areas, if they are applicable in your situation. If any of the topics below resonate with you, this can serve as a reminder to call your team of financial advisors to assure we have addressed all planning opportunities in a timely manner.

Check Your Income Withholding

The federal income tax is a pay-as-you-go tax, meaning, taxes must be paid as income is earned or received. For many, that means withholding taxes from their wages. Employers use current IRS tables to calculate your withholding. If you want to change your withholding, you will need to submit a new Form W-4 to your employer with any adjustments.

As tax laws, tax rates, and tax brackets change, so do the IRS tables.  To avoid any surprises at tax time, withholding should be reviewed periodically throughout the year and adjusted as necessary.  The IRS (irs.gov) has an online calculator that can help you determine the appropriate amount of withholding.

Alternatively, JFS tax planning clients can utilize our tax planning department for help in assessing the proper withholding amounts for the new year.

Maximize Retirement Plan Contributions

Qualified contributions to your employer-sponsored retirement plan can provide valuable tax deductions now in addition to allowing the income to grow tax-free until withdrawn.  It is important to review your contribution elections at least annually to ensure that you are contributing enough to maximize your employer’s matching contributions.  Starting early, saving aggressively, and maximizing those contributions now will help ensure a comfortable retirement, even if it’s decades away.

Below are contribution limits for 2022 based on the type of retirement plan:

  • IRA limits: $6,000 plus a catch-up contribution of $1,000
  • 401(k), 403(b) and 457(b) limits: $20,500 plus a catch-up contribution of $6,500
  • SIMPLE IRA limits: $14,000 plus a catch-up contribution of $3,000

Note: Catch-up contributions are available for those who are 50 and older.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Accounts (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit have all increased for 2022.

  • The deadline to make 2021 IRA contributions is April 15, 2022. Contributions can be deposited electronically or mailed by check to the custodian if postmarked on or before April 15.
  • Contributions to employer-provided retirement plans such as 401(k) plans made automatically through payroll deductions can be adjusted.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.)

It is important to review your salary deferral elections (as a percentage or flat dollar amount per pay) each year to ensure you are saving enough to meet your financial goals as your income and the contribution limits grow.

Set Up a Self-Employed Retirement Plan

Self-employed individuals face many unique challenges and opportunities in growing and managing their business, minimizing taxes, and maximizing profitability and cash flow.  One important tax planning opportunity that is sometimes overlooked is retirement planning.  There are several different retirement plan options available for self-employed individuals, and the one that works best depends on the owner’s tax situation.

Some plans are required to be set up by year-end while others can be established up until the extended due date of the owner’s personal tax return.  Regardless of the timing of the plan setup, now is the time to be evaluating the type of retirement plan to put in place.

Plan for Required Minimum Distributions (RMDs)

A required minimum distribution (RMD) is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age. The SECURE Act legislation passed in late 2019 increased the age for taking Required Minimum Distributions (RMDs) from 70 1/2 to 72.

  • Your initial distribution amount is based on your age and the value of your Traditional IRA and/or employer-sponsored plan (e.g. 401k or 403b) as of December 31, 2021.
  • If you turned age 72 in 2021 (and age 70 after July 1, 2019) your first RMD is due by April 1, 2022.
  • If you turn age 72 in 2022, you have until April 1, 2023, to complete your initial required minimum distribution (RMD).
  • Subsequent RMDs must be taken by December 31 of the same calendar year and determined by the value of your account as of the prior year-end balance.
  • You can generally avoid taking an RMD from your employer plan if you are currently employed unless you are an owner.

If you are inheriting a retirement account from the original account owner, the RMD rules can vary depending on your age and relationship to the account owner.  Generally, a designated beneficiary is required to liquidate the account by the end of the tenth year following the year of death of the IRA owner (this is known as the 10-year rule).  In other cases, a designated beneficiary may be able to stretch the RMD payments over his or her expected lifetime.

Please consult with your JFS wealth advisor for appropriate planning guidance and to review your options. If you have retirement accounts outside of JFS, please make sure you coordinate with the respective custodian(s) before year-end for those RMDs. The penalty for missing the deadline is a hefty 50% of the amount not distributed.

Review Life and Disability Income Insurance

How has your financial situation changed since last year? It is important to review your life and disability insurance coverage periodically, especially if you have kids or other dependents who rely on you financially.  If you become unable to work or die prematurely, these types of insurance protect your family’s future financial needs.

Examples of coverage may include replacing lost income and retirement savings, paying off certain types of debt, covering funeral expenses, and helping cover future education expenses for your children.  Your JFS wealth advisor can analyze your insurance needs and recommend an appropriate and affordable amount of coverage for you and your family.

Consider Gift and Estate Tax Exemptions

For 2022, the annual gift exclusion has increased from $15,000 to $16,000 per person per recipient (the first increase in the annual gift exclusion since 2018).  That means up to $16,000 (or $32,000 where spouses elect to split gifts) per donee is excluded from the total amount of taxable gifts subject to the gift tax.  As such, these amounts are not taxed and do not use up any of the donor’s lifetime gift tax applicable credit amount. Gifts are considered made in the year of transfer.

The lifetime estate exclusion amount has increased from $11,700,000 per person to $12,060,000 per person, or $24,120,000 per married couple. Because the doubling of the estate and gift tax exclusion amount expires for decedents dying and gifts made after December 31, 2025, the next few years present a tremendous opportunity for wealthy individuals and married couples to make large gifts, including those that leverage the amount of the available exclusion

Update Your Estate Plan 

No matter your level of wealth, it is important to craft an estate plan with a qualified attorney.  A basic estate plan will include a will, a power of attorney (POA), and an advanced healthcare directive (for medical and end-of-life care).  Trusts may also play an important role in your estate planning strategy.

Your JFS wealth advisory team can explain how accounts we manage fit into your estate planning picture and refer you to the appropriate legal resources if your plan needs to be updated.

We’re Here to Help You

As you can see, there are several rules, deadlines, and limits that change from year to year. As the year unfolds, new legislation may also impact some of these current limits and other rules.  The proposed Build Back Better Act, which passed the House last fall but has since stalled in the Senate, includes several provisions that would likely have a significant tax impact on several of our clients.

We will continue to provide timely updates regarding this important legislation, and encourage you to reach out to your JFS wealth advisory team or tax professional if you have questions.

It is our privilege to help you plan and build for the future, and we look forward to continuing to work with you in the years ahead.